News

CME: Pork Supplies Expected to Increase Further in 2018

14 September 2017

US - USDA updated its projections for 2017 and 2018 grain, livestock
and dairy production. There were a number of surprises, particularly on the grain side, reports Steiner Consulting Group, DLR Division, Inc.

Coming into the report most grain analysts expected USDA to modestly lower its projected yields for corn and soybeans. The average of analyst yield estimates was 168.2 bu./acre compared to the August USDA estimate of 169.5 bu.

In the September WASDE report, however, USDA went the other way and raised its projected yield estimated to 169.9 bu/acre. Current projection is for US corn production to be 14.184 billion bushels.

This level of production is still about 6.4 per cent less than a year ago but that may not mean much when we are carrying over such a large supply of corn from the previous year. USDA indicated those carryover stocks are expected to be 2.350 billion bushels.

One of the critical numbers in the USDA balance table is the level of exports for 2017/18, which is expected to decline 16.9 per cent. It is largely due to the decline in export volume that USDA expects ending stocks for the new marketing year to be about the same as it was for the old one.

The projected stocks/use ratio for corn currently stands at 16.4 per cent, leading USDA to peg its average farm price in a range of $2.80 - $3.60, price levels that should continue to underpin expansion in red meat and poultry production.

There were only modest adjustments to US red meat and poultry projections for this year and next. The charts below show the revisions made to the 2017 forecasts as well as the expected change in production, trade and domestic availability for next year.

We have circled the domestic availability increase for the three main species because, to us, that is one of the more critical numbers to watch as we contemplate the outlook for prices next year. What stands out is that available supplies are expected to increase for all three major species.

However, the rate of increase will differ and it is this difference in supply growth that may impact relative pricing for red meat and chicken. In the case of beef, output is expected to continue to expand but at a more modest pace.

Beef production in 2017 is expected to be up 1.338 billion pounds (+5.3 per cent). In 2018, beef production is forecast to increase 716 million pounds (+2.7 per cent). Per capita beef consumption/availability is forecast up 3.6 per cent this year and 1.6 per cent next year.

USDA now expects steer prices next year to be around 2.9 per cent lower than in 2017 and 4.4 per cent lower than in 2016. At this point futures have a slightly more bearish outlook than the USDA fundamental supply/demand forecast.

Based on the latest USDA closing prices, futures are expecting fed cattle prices in 2018 to be down 4.6 per cent vs. the 2017 average.

Pork supplies are expected to increase further next year and, more importantly, per capita availability is expected to be larger. Total pork production this year is forecast at 25.857 billion pounds, some 900 million pounds (+3.6 per cent) higher than a year ago.

Very strong pork exports in the first half of the year helped absorb a good portion of this supply increase. US pork exports in 2017 are forecast at 5.753 billion pounds, 514 million pounds (+9.8 per cent) higher.

Next year, pork supplies are expected to increase by a similar amount. Total output is projected to be 26.731 billion pounds, 874 million pounds higher than in 2017. However, exports are forecast to increase by just 212 million and imports are forecast to decline by 160 million.

Why lower imports when Canada is expanding? Why lower pork exports considering very competitive US prices? Topics for debate in the coming months. Because of a less bullish outlook for US pork trade, per capita domestic pork consumption in 2018 is expected to increase 1.4 per cent vs. just 0.4 per cent in 2017.